Navigating International Investment Banking Regulations for Analysts

1. Regulatory environment for analysts at international investment banksDan Harverd, September 2006

2. Disclaimer • The material in this presentation is based on personal experiences of working in a number of international investment banks and does not represent a comprehensive overview of the compliance policies of my current or former employees.

3. Some general principles of conducting research • Comply with local regulatory requirements, implement best practise • Analyst reports must be unbiased, accurate, comprehensive, fair and reasonable • Regulation AC (Analyst Conflict) disclosures • publication reflects personal view • no link between recommendation and compensation • moment of reflection • No inappropriate pressure from outside research on coverage or rating • Changes to ratings, price targets, estimates made through public written research, not private communications • Broader view - money laundering training

4. Content of research report • Opinions separated from facts • Substantiation of valuation technique • Why use DCF? Multiples? Peer analysis • What are underlying assumptions of WACC, terminal growth? • Why should stock trade at discount/premium to comparables? • Analysis of risks • What factors may make rating wrong? • What may prevent achievement of price target? • Macro is fine, but company specific is necessary • Upside risks also assessed on Sell/Hold • Disclosures • Identify where conflicts of interest may exist

5. Understanding the Chinese Wall – protects analysts from receiving material non-public information – protects investors from potential market abuse Corporates Research Corporate Finance Trading Sales The Chinese Wall Investors

6. How the Chinese Wall is implemented • Corporates don‘t have Chinese Walls but should act with analyst as if they exist • Research may not report to Banking • Physical separation and restrictions on communications/information • Analyst compensation may NOT be based directly on: • Banking revenues • Analyst contribution to specific transaction • Analyst ability to secure/maintain banking relationship • Any input from banking • Specific recommendation • Different procedures in US and RoW e.g.chaperoning of communications • Research production process: supervisory analyst, compliance check

7. Implications of Wall Crossing • Process managed by Compliance Department and Research Management • While over the wall • No research coverage • No disclosure of information • No encouraging others to deal in the security • Receipt of non-public information makes analyst an insider • Communicates immediately to compliance and above rules apply

8. Barriers between research and sales & trading • Designed to prevent ‘front running’ • No prior disclosure of view/recommendation change • Simultaneous broad dissemination of research to market • Views communicated to S&T must be consistent with published views • Physical separation between analysts and S&T • Analysts can‘t be used to sell a transaction or security • Trading is treated like any other firm client • Analysts don’t systematically receive customer trade information